The Deal: FCC Tries to Spark Foreign Capital Infusion Into Stations

NEW YORK ( The Deal) -- Tom Wheeler will kick off his tenure as Federal Communications Commission chairman by relaxing restrictions on foreign ownership of TV and radio stations when he presides over his first FCC meeting Nov. 14.

The move is intended to draw much-needed new capital to the broadcasting business.

Since passage of the Communications Act of 1934 the FCC has capped foreign investment in broadcast licensees at 25% and only once has the commission waived the rule, in 1994 when it retroactively approved Australia-based News Corp.'s ( NWS) purchase of U.S. television stations 10 years earlier.

The rule has its roots in the Radio Act of 1912, which limited radio licenses to U.S. citizens or corporations amid the international tensions leading up to the First World War.

Today, no other telecom sector -- cable and satellite TV, wireless, telephone or Internet -- is so restricted. The change has broad support across a variety of interests. Broadcasters want the cap lifted to boost the value of their stations. Minority business owners in the U.S. like the idea because they expect it will increase their access to capital -- historically difficult for minorities seeking to get into the broadcasting industry. And activists opposed to media consolidation support the change as a way of bringing new buyers and more diversity to broadcast ownership.

The effort to make a change now was instigated by Democratic Commissioner Mignon Clyburn, who was the FCC's acting chairwoman until Wheeler was sworn in Nov. 4. On Oct. 24 Clyburn asked her FCC colleagues to support a declaratory ruling that would, on a case-by-case basis, permit investments from foreign individuals and companies to exceed the 25% stake. Her move was endorsed by Republican Commissioner Ajit Pai, who has been pressing for the change for a year.

"A foreign company can indirectly hold more than a one-quarter stake in our nation's largest wireless carriers, cable operators, cable programmers, and Internet backbone providers," Pai said in a statement praising Clyburn. "Yet that company cannot own a similar interest in a single radio station in rural Kansas. This disparity makes no sense, especially considering the difficult financial circumstances facing many broadcasters."

The policy change would make it easier to get the commission to act on investments that exceed the 25% threshold. Establishing a mechanism for approving the requests as part of the normal course of commission business would lead to prompt action whereas waiver requests tend to be set aside, sometimes for years.

Wheeler hasn't publicly said whether he'll support removing the cap but agency observers believe Clyburn wouldn't have teed up the proceeding without an indication of support from him while his nomination was pending.

the push to lift the cap is being pitched as a way to bring more investment to capital-starved stations in small markets. In comments to the FCC, the National Association of Media Brokers said the change could aid acquirers trying to finance purchases of smaller broadcast properties, an always challenging proposition made even more difficult by the post-recession marketplace. The brokers group said many companies that once funded acquisitions by new owners have exited the business. "Thus, while there remains a high inventory of stations that are available for purchase, and there is always a large number of individuals who are interested in becoming buyers, the lack of available capital is the primary issue that discourages new entrants into broadcast ownership."

But Paul Gallant, telecom and media analyst for Guggenheim Securities, said the stations most likely to receive foreign investment are those in big cities with large ethnic populations. He said that many overseas channels have been looking for a way to get a foothold on U.S. pay TV channel lineups. Buying into local TV stations can make that happen because TV stations are entitled to mandatory carriage on their local cable systems. "Cable companies don't want to add more channels but, for instance, a Korean language programmer could 'must-carry' their way onto a cable system."

Gallant predicted that broadcast chains Nexstar Broadcasting Group ( NXST), LIN Television ( LIN) and Gray Television ( GTN) could be big beneficiaries of foreign investment. Those station groups don't have the size to match the lower financing costs of more aggressive acquirers such as Sinclair Broadcast Group ( SBGI) and Gannett ( GCI) and an influx of investors would give them the cash to keep pace.

Gallant said station owners would be eager to sell right now because broadcast valuations have spiked. "Now would be a great time to sell because of the run-up in stock prices," he said.

David Honig, president of the Minority Media and Telecommunications Council, an advocacy group for minority ownership initiatives that also runs a minority-focused station brokerage, said raising capital for station purchases by minorities has been a struggle since 1995. That year, Congress did away with a program providing tax breaks to owners who sold stations to minorities. Minority ownership of stations quadrupled during the 17 years the tax break was in place, but since then "access to capital is the No. 1 impediment to growth of minority ownership in broadcast stations," Honig said.

According to Free Press, women own a total of only 67 stations, or 4.97% of all stations, and minorities own only 44 stations, or 3.26% of all stations.

Honig said foreign buyers are unlikely to acquire total control of the stations, choosing instead to let local personnel make the operational and programming decisions. He won't reveal the names of interested investors but said MMTC's brokerage business has fielded inquiries from potential buyers in the U.K. Japan, Jamaica, Nigeria, Spain and Venezuela.

Honig also predicted that lifting the cap would lead to reciprocal elimination of foreign ownership restrictions in other countries, opening the door for station groups, particularly Spanish-language broadcasters like Univision Communications that would likely want to expand into Mexico and Latin America.

Sherrese Smith, partner in the media practice at Paul Hastings, suggested that TV stations, which are more profitable than radio outlets, will be the first target of foreign investors. "The initial influx will be on the TV side. New money is something the industry could use to continue growing and put broadcasting in line with the other telecom industries. There's a recognition that additional funding is needed from outside the U.S."